Financing a software company can be made through the following channels.
Venture capital financing is nascent in India. However, with the number of software companies increasing and with the recognised strength of Indian software export industry, mobilising venture capital funding for a company has become simpler.
Increasingly, software companies are mobilising resources from the capital market. This is due to the phenomenal increase in the amount mobilised from the market during the last five years. The growing popularity of regional stock exchanges makes this option attractive.
Companies intending to raise resources from the capital market are required to conform to the guidelines on disclosure and related matters issued by the Securities and Exchange Board (SEBI).
Issuing debentures and accepting fixed deposits, are other options. These are debt instruments, and regulated by the Companies Act and the guidelines of the Reserve Bank of India. Sound credit ratings from established agencies help attract investors. Such ratings are instrument-specific and are not for the company as a whole.
Mutual funds and non-banking financial companies are increasingly playing a dominant role in the capital market. Reservation of allotment to mutual funds, bought out deals, etc. have considerably reduced the burden of securing subscription for public issues.
A variety of other instruments are available for short term and specific requirements. Cash credit, inter-corporate deposits, bill discounting, factoring, export financing, commercial papers are a few of the popular ones in the market.
Working capital requirements can be met by availing of an advance from commercial banks. Banks normally insist on a security for such advances. If the quantum of funding is high, commercial banks form a consortium to sanction a loan. The RBI has deregulated interest rates, and these are now determined by the lending bank on a case by case basis.
